Tax reform with eye on election

A 40 per cent “super profits" resource rent tax that will pay for higher superannuation contributions, a cut in the company tax rate and resources infrastructure is the response to the Henry tax review that the Rudd government will take to the election as its second-term tax agenda.

The government has eschewed a complex reform agenda in an election year – focusing on just three key reforms from almost 140 recommendations laid down by the tax review panel.

But while the government was immediately criticised for the political caution of its response to the sweeping reform blueprint, it has put all its political eggs in one basket – spoiling for a fight with Australia’s most prosperous industry and risking a major scare campaign about the impact of its proposals on the national economy.

The new resources tax is forecast to add an extra $12 billion in revenue between 2012-13 and 2013-14.

The government says it will divide the new revenue boom between measures to boost retirement savings, infrastructure spending in resources states, and a cut in the company tax rate that will help spread the benefits of the boom to other parts of the economy.

It argues a cut in the company tax rate to 28 per cent – which small business will get earlier than larger businesses – will help employers meet the cost of a lift in the superannuation guarantee charge (SGC) from 9 per cent to 12 per cent.

Small business will also benefit from a provision to allow the instant write-off of assets valued at $5000 compared with $1000 now.

The government has ignored the Henry review’s call to abolish the superannuation earnings tax and shift the basis of the contributions tax to one in which contributions are taxed at taxpayers’ marginal rates then subject to a rebate of 20 per cent – a move that would have savaged tax concessions for high-income earners.

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Instead, Treasurer
Wayne Swan
said yesterday the government would raise the SGC as a means of instilling certainty in the super system.

The increase in the SGC will have a long lead time to allow businesses “to benefit from the government’s tax reforms" before making the first extra contribution of 0.25 per cent in 2013-14.

The government has not explicitly ruled out pursuing Henry’s super tax reforms later, as it has with a range of more radical tax proposals, including making the family home subject to land tax.

But Financial Services Minister
Chris Bowen
told The Australian Financial Review that the government would not make any more changes to either the earnings or contributions taxes in the foreseeable future. The government says the reforms will be revenue neutral.

After accounting for proposed spending on company tax and small business incentives, superannuation changes and infrastructure spending, this suggests the government still has $3.18 billion of spending or tax cuts to announce, probably in next week’s budget.

The government will avoid imposing double tax on the resources sector – which already pays state mining royalties – by giving a rebate on companies’ tax bills equal to the royalties payments before imposing the new 40 per cent tax. This would also mean the states would be able to hold onto their royalties revenue. There would also be generous new incentives to encourage mining exploration.

The Henry review outlines a radical agenda for tax reform into the future, including a possible personal income tax scale with just two rates – 35 and 45 per cent – and a much higher tax-free threshold of $25,000, although this remains one of the many tax reforms, along with issues such as transport tax, that have been put in the too-hard basket for now.

Mr Swan said the measures he outlined were the first steps in a 10-year agenda “to ensure that we share prosperity fairly, maximise our opportunities and keep Australia in the box seat as the global recovery gathers pace".

He said: “This package is carefully calibrated to make the most of the opportunities presented by the commodity boom Mark II, but also to address the challenges that it presents."

However, Opposition Leader Tony Abbott said the proposals represented a $29 billion tax grab and put “higher taxes on easy targets but put off the hard decisions on cutting out-of-control government spending".

The resources sector expressed alarm. BHP Billiton said the new tax would raise its effective tax rate on Australian operations from 43 per cent to 57 per cent.

The government has ruled out taking up recommendations in 19 areas, including changes to alcohol tax and abolishing the luxury tax.

The revenue raised from the resources tax will be split three ways. A total of $700 million will placed in a new resources state infrastructure fund in 2012-13. As well, $2 billion will fund a cut in the company tax rate to 29 per cent from 2013-14 and 28 per cent in 2014-15, and small businesses will have a lower company tax rate of 28 per cent from 2011-12 at a cost over three years of $550 million. There will also be changes to the depreciation regime for small businesses with a new instant write-off for assets worth up to $5000.

The final third will fund a government super contribution of up to $500 for workers with incomes of up to $37,000 and a reversal of last year’s decision to cut the cap on contributions for people about to retire to $25,000 if they are over 50 and have super balances below $500,000.